An Insurance Mess and it isn’t Obamacare

If you read the papers it looks like Obamacare – the Affordable Care Act – is the only insurance related news worth talking about. It’s not: the National Flood Insurance Program (NFIP) hasn’t garnered the same ink as healthcare, but for some folks it is shaping up to be a major headache. We wrote a bit about the problem in this blog over a year ago at a time when renewal of the whole program was in some question. That was before Hurricane Sandy came along in October of 2012 to remind us of both the need for a federal interest in flood insurance and the huge costs associated with program operations.

The National Flood Insurance Program had been established in 1968. The program allowed property owners in participating communities to purchase flood insurance – sometimes at subsidized rates – so long as their community adopted floodplain management rules and set standards for new construction. The idea was to improve community protection against flood damage.

Over the years, the costs and consequences of flooding have continued to increase and the NFIP – which was supposed to operate on premiums with the federal government operating as a backstop – is now some $25 billion in the hole. Some of the reason for this situation is that existing homes and businesses did not have to retrofit to higher standards so rates did not necessarily reflect their true risk. Furthermore, whether by global warming, climate change or just pure bad luck we have endured storms of historic proportions like Hurricane Katrina and Hurricane Sandy that have hit the program hard. Finally, by having a program that offered insurance to people in flood prone areas the government was viewed as encouraging people to build in areas that were unsafe – or at least protecting them from the full consequences of intemperate actions.

When the talk of not renewing the program stopped, attention turned toward ways to make the program sustainable by having the premium structure reflect the true risks and costs of flooding. This was what the Biggert-Waters Flood Insurance Reform Act of 2012 tried to do. The Act extended the National Flood Insurance Program for five years and required changes to the way the Program is run. Key provisions of the legislation require the NFIP to raise rates to reflect true flood risk, make the program more financially stable, and change how Flood Insurance Rate Map (FIRM) updates impact policyholders. These changes are likely to mean premium rate increases for many policyholders over time.

While the changes were being debated, discussion circulated around some very visible situations. Well off people building view homes on flood prone shorelines are easy targets for political rhetoric and there was an element of truth to the notion that flood insurance could mitigate the true cost and risk of building in some areas. Fast forward to reality after the bill has passed and it appears that in many cases Main Street may also be swept up in the effort to phase out subsidies and discounts.

In California, for example, almost 10 percent of the Bay Area is judged to be in a 100-year flood zone with a bit over 3% of residential area within that zone. Properties in these special flood hazard areas must have flood insurance if they have a federally insured mortgage. And, while property-owners in lower-risk areas are not required to purchase national flood insurance some 51,000 Bay Area properties have national flood insurance which may be subject to serious rate increases either in the near term or when the property changes hands. There are already reports of property sales going sour as a result of the premium increases.

Similar situations obtain on the east and gulf coasts. In Johnstown, Pennsylvania a policy for a homeowner in a “high risk” neighborhood and required to carry flood insurance saw the one-year premium for a house with a $26,000 mortgage jump from $287 to $1,216. Part of the problem seems to be that the law was written in broad strokes with hurricanes and disasters in mind, but its implementation is sweeping in much broader categories of risk. As it is being implemented, there is great concern – particularly among realtors – that implementation of the law will have a serious impact on homeowners and real estate alike. States along with realtors associations are lining up to seek a delay in implementation or a change to the new FEMA guidelines. Mississippi has taken a strong legal stance, bringing suit against the federal government to block rate hikes. In these older gulf coast areas, it is not millionaires building view homes that are being affected, 41 percent of homeowners living in areas where flood insurance is mandatory are low to moderate income folks. The situation is so dire that even Rep. Maxine Waters — the law’s co-author — is backing efforts to delay rate hikes for most affected by the changes.

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